Weekly Strategy Discussion

The Weekly Strategy Discussion is designed to assist individuals in learning how options work and in understanding various options strategies. Options involve risk and are not suitable for all investors. The strategies discussed are for educational and illustrative purposes only, and should not be construed as an endorsement, recommendation or solicitation to buy or sell securities. Commissions, taxes and transaction costs are not included. Please contact a tax advisor for the tax implications involved in these strategies.

Selling Puts for Income

Example:                 Stock is trading at $50 

Outlook:                  You are looking to generate income by selling option premium on a stock which you believe will be trading in a narrow range.

Possible strategy:    Sell one 30 day 45 strike put at $1.60

*All values shown are at the time of expiration. Commissions and other trading fees not included.

Stock

Short 45 Put

Short 45 Put Profit (Loss)

Net Profit (Loss)

40

(5)

1.60

(3.40)

45

0

1.60

1.60

50

0

1.60

1.60

55

0

1.60

1.60

60

0

1.60

1.60

 

 

At Expiration:

  • Maximum Profit = Premium received for sale of Put
  • Maximum Profit = $1.60
  • Breakeven = Short Put strike price - Premium received
  • Breakeven = 45 - $1.60 = $43.40
  • Maximum Loss = Stock ownership below $43.40

 In Summary: Selling out of the money put options for income may be a suitable strategy for a stock that trades in a narrow range. Should the stock drift lower and you become assigned on the sale of the put you have the obligation to purchase shares of stock. However, the premium received for the sale of the put will lower your cost basis for the stock.

  VIX Snapshot

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